How do we convert from a for-profit LLC to a non-profit 501(c)(3) organization?

From a corporate law standpoint, the conversion itself is simple: You must adopt an amendment to the Articles of Incorporation of the business corporation. Approval of 100% of the shareholders is required for such an amendment, since the conversion is taking their property from them. You would also need to add the mandatory provisions of nonprofit Corporation law. Any outstanding shares must be eliminated or converted to memberships. This part should take only a couple of weeks. The hard part is qualifying as a nonprofit. Extensive applications to the IRS and State authorities are required to obtain the necessary permissions and tax exemptions. This would be no different from the requirements for a new nonprofit to qualify, so there may not be much benefit to conversion versus formation of a new corporation to function as the nonprofit entity,as to the amount of legal work. The tax advantage of conversion versus new startup may be very large however. This could take a couple of months to prepare and file, depending on how well laid out your plans for operation as a nonprofit already are. The response from IRS and the state will probably take months and will require some correspondence to meeet their requirements. Conversion as of the end of the fiscal year makes it a bit easier on the CPA's, but it's not critical. The corp will likely be a "private foundation" as it is not receiving broad ppublic support. Hence the owner of the business corp will be a "substantial contributor" and the 501(c)(3) org will be very limited in how much compensation the former owner can be paid from the org. Any such payment should probably be made from corporate assets before the conversion ( a taxable dividend), and even that requires legal review. You need a good nonprofit corp lawyer who is admitted in Oregon. DISCLAIMER—This answer is for informational purposes only under the system, its terms and conditions. It discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. Each state has different laws and the answer could be different if all the facts were known. Full evaluation of your legal situation would require personal consultation permitting an understanding of all the facts and circumstances. This answer does not establish an attorney client relationship. (Bryant) Keith Martin sbbizlaw.com

Though I'm not licensed to practice in Oregon, generally there are three ways in which to accomplish the objective. To fully understand and appreciate the possible processes, however, it's important to remember that we must consider both state law and federal tax law. The possibilities (which vary from state to state) include: (1) Form a new non-profit corporation and purchase the tangible and non-tangible assets of the LLC. You'll definitely want to work with a professional advisor on this, however, as there are penalties for private enurement / excess benefit that might apply if the owner receives an unfair amount from the transaction. (These rules are complex. You must obtain competent advice.) (2) Convert the LLC to a non-profit corporation. Some states allow an entity to elect to convert from one type of entity to another. (3) Amend the articles of organization of the LLC to allow it to engage in non-profit activity. (For IRS purposes, the intent would be to cause the LLC to be treated as an unincorporated association.) Regardless the choice, the non-profit corporation would need to prepare and file IRS Form 1023 so as to apply for recognition of tax exempt status. The total process likely will take 3-4 months. The IRS review of the 1023 application likely will be the longest time period, though I've had several approved in 40 days or less recently. I don't believe the timing really matters. To "compensate the owner" is difficult. Logically, there are three options that are most likely. The first is to have the LLC sell its assets, following which the LLC would distribute the profit to its owner. The second is to allow the owner to retain any intellectual property (i.e., trademarks, copyrights, patents, etc.) associated with the organization's activities and then license the intellectual property to the organization. The third is to have the non-profit corporation enter into an employment agreement with the LLC owner. All these possibilities, however, can give rise to concerns regarding private enurement and excess benefit transactions. Finally, make sure that you explore whether the entity or its officers/directors need to register to conduct charitable fundraising. Most states require some type of registration before soliciting funds (or within a short time thereafter).